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The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost €5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow euros, whereas the normal borrowing rate in the euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow dollars in the United States at a rate of 8 percent.
Suppose a Spanish MNC has a mirror-image situation and needs $2,900,000 to finance a capital expenditure of one of its U.S. subsidiaries. It finds that it must pay a 9 percent fixed rate in the United States for dollars, whereas it can borrow euros at 6 percent.
The exchange rate has been forecast to be $1.33/€1.00 in one year. Set up a currency swap that will benefit each counterparty.
Pine Tree Farms Corporation (PTFC) has a target capital structure of 30% debt, 10% preferred stock, and 60% common equity. Currently PTFC has a capital structure of 75% debt, 10% preferred stock, and 15% common stock.
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,290,000. Over the past five years, the price of land in the area has increased 5 percent per year, with an annual standard deviation of 34 percent. H..
Caffrey obtained an antique 12 years ago for $3,000,000. He recently sold it to a private collector for $17,000,000. Assuming that his personal income tax rate is 35% and the capital gains tax rate is 20%, how much tax will he be required to pay on t..
Draft budgeted financial statements from 2012 to 2015 under both options that provide a realistic assessment of expected revenues and costs, and explain how you have arrived at these budgeted figures.
O’Connell & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. O’Connell currently has no debt, and its cost of equity is 12 percent and the tax rate is 35 percent. The company borrows $125,000 and uses the proce..
Abbott Lab made $2.80 net income per share last year and paid out $1.30 in dividend. The company had a book value (or equity) per share of $20. The market has a risk free rate of 3.1% and market return 11.1%. What’s the discount rate using CAPM? Ca..
What is the major determinant of bond prices? The ABC bond carries a 6.5% semi-annual coupon rate and matures in 23 years. If the market yield on these bonds is 8%, calculate the price of the bond. If interest rates (yields) do not change in the mark..
Assume Kang Inc. is a $1 billion all-equity firm with a tax rate of .2 and a beta of .8. The riskfree rate is 2% and the equity risk premium is 6%. What is its WACC? Assume Kang Inc. is considering issuing .2 billion in debt to retire equity. This de..
Assume that you manage a risky portfolio with an expected rate of return of 16% and a standard deviation of 45%. The T-bill rate is 6%. Your risky portfolio includes the following investments in the given proportions: Your client decides to invest in..
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of 0.75. It’s considering building a new $60 million manufacturing facility. This new plant is expected to generate aft..
Calculate the present value today of a $4,450 cash flow expected to be received exactly 9 years from today if the required rate of return on this cash flow is 8% per year. Calculate the present value of the following series of cash flows if the appli..
The original Barbie doll was introduced in 1972 and sold for approximately $3.00. In year 2015, a mint-condition doll in its original box would be listed on EBay at approximately $700.00. What average annual rate of return would the seller realize if..
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